CPA REG: Ethics and Federal Tax Procedures

CPA means Certified Public Accountant. REG means Taxation and Regulation. Use this focused page when your CPA REG misses are about practitioner duties, return positions, federal tax procedure, penalties, filing rules, or taxpayer representation. Drill this topic before returning to mixed practice.

Topic snapshot

What this topic tests

This topic tests the boundary between a CPA’s professional responsibility, a taxpayer’s duty, and the IRS procedure triggered by the facts. Good answers identify who is acting, what standard applies, what deadline or penalty matters, and whether disclosure or correction is required.

Common traps

• confusing taxpayer penalties with preparer penalties or practitioner discipline
• treating an extension to file as an extension to pay
• missing the difference between a return position, a disclosure requirement, and a representation issue
• applying a general ethics instinct when the stem is really asking for federal tax procedure

How to reason through these questions

Identify the actor first: taxpayer, preparer, practitioner, IRS, or court. Then identify the procedural stage: filing, examination, appeal, collection, penalty, or representation. The best answer usually follows the actor and stage more closely than the broadest-sounding ethics choice.

Sample questions

These questions are original Mastery Exam Prep practice items aligned to this topic area. They are designed for self-assessment and are not official exam questions.

Question 1

Topic: Ethics, Professional Responsibilities and Federal Tax Procedures

A state board of accountancy is investigating Rana, a CPA, after a client’s business tax return was filed with questionable deductions. The board’s proposed conclusion is that Rana’s conduct is subject to discipline as a public-protection matter because it shows a lack of integrity and professional conduct, not merely a client fee dispute or an unsupported tax position. Which evidence best supports that conclusion?

• A. An IRS notice disallowing deductions because the client did not keep receipts, with no indication that Rana knew the deductions were false.
• B. An invoice showing that Rana charged the client a higher preparation fee than the client paid in the prior year.
• C. An engagement letter stating that Rana would rely on information provided by the client unless it appeared incomplete or inaccurate.
• D. An email from Rana to the client stating, “I know these are personal expenses, but I will list them as business deductions so the refund is larger.”

Best answer: D

What this tests: Ethics, Professional Responsibilities and Federal Tax Procedures

Explanation: The strongest support is evidence that the CPA knowingly helped file false information. State boards discipline CPAs to protect the public when conduct reflects dishonesty, lack of integrity, or unprofessional behavior, not simply because a tax position later fails.

Public-protection regulation focuses on whether a licensed CPA’s conduct threatens public trust in the profession. A state board may discipline conduct involving dishonesty, false statements, or other acts showing lack of integrity in professional services. The email shows Rana knew the expenses were personal and still agreed to report them as business deductions to increase the refund. That evidence directly connects the CPA’s conduct to intentional misrepresentation in a professional engagement.

• A higher fee may support a billing dispute, but it does not show dishonesty or a public-protection violation.
• An IRS disallowance for missing receipts may show weak substantiation, but without CPA knowledge it does not prove lack of integrity.
• A reliance clause generally supports permissible reliance on client information unless red flags exist.

A contemporaneous admission that the CPA knowingly reported false deductions directly supports a public-protection finding based on lack of integrity and professional conduct.

Question 2

Topic: Ethics, Professional Responsibilities and Federal Tax Procedures

Patel, CPA, was paid to prepare Reed’s 2025 Form 1040. Reed’s return claimed a $38,000 Schedule C vehicle expense deduction. During an audit, the IRS disallowed $30,000 and proposed an accuracy-related penalty against Reed. The agent is also considering whether a separate return preparer penalty applies to Patel for the same deduction. Which evidence best supports the conclusion that a preparer penalty, rather than only a taxpayer penalty, may apply?

• A. Patel’s contemporaneous workpaper states that Reed had no mileage log or other required substantiation, but Patel claimed the vehicle deduction without disclosure to keep the refund high.
• B. Reed’s post-filing email to Patel admits that Reed estimated the vehicle miles and never kept a contemporaneous log, with no indication Patel knew this before filing.
• C. The filed Form 1040 shows Patel’s paid preparer signature, PTIN, and firm address.
• D. The IRS notice to Reed computes a 20% accuracy-related penalty on Reed’s underpayment attributable to the disallowed vehicle expense.

Best answer: A

What this tests: Ethics, Professional Responsibilities and Federal Tax Procedures

Explanation: A taxpayer penalty focuses on the taxpayer’s underpayment and conduct, while a preparer penalty focuses on the preparer’s conduct in preparing the return. The strongest support for a preparer penalty is evidence that Patel knew the deduction lacked required substantiation before filing and claimed it anyway.

For the same disallowed return position, separate penalties may apply to different parties for different reasons. A taxpayer accuracy-related penalty is imposed on the taxpayer and is based on the taxpayer’s underpayment, negligence, substantial understatement, or similar conduct. A return preparer penalty requires evidence tied to the preparer, such as an unreasonable position the preparer knew or should have known about, or willful or reckless conduct. Patel’s workpaper is the best evidence because it documents Patel’s prefiling knowledge that required support was missing and that the deduction was claimed anyway without disclosure.

• The IRS notice to Reed supports a taxpayer accuracy-related penalty because it is computed on Reed’s underpayment, not on Patel’s conduct.
• Reed’s post-filing admission supports client negligence, but it does not show what Patel knew when preparing the return.
• Patel’s signature and PTIN establish paid preparer status, but status alone does not establish a preparer penalty.

This evidence directly shows Patel knew the position lacked required support before filing and nevertheless claimed it, which is preparer conduct that may trigger a preparer penalty.

Question 3

Topic: Ethics, Professional Responsibilities and Federal Tax Procedures

Miller, CPA, prepared an individual income tax return for a client that claimed a large Schedule C deduction based on the client’s oral description. During an IRS examination, the IRS proposed a 20% accuracy-related penalty against the client for negligence and sent Miller a separate letter proposing a return preparer penalty because Miller allegedly failed to make reasonable inquiries about the deduction. The audit response deadline has not passed, and Miller’s file contains no receipts, client questionnaire, or tax authority analysis supporting the deduction. What should Miller do next?

• A. Advise the client to pay the proposed taxpayer penalty immediately and then wait to see whether the IRS withdraws Miller’s preparer penalty.
• B. File one response stating that if the client had reasonable cause, the IRS must withdraw both the taxpayer penalty and the preparer penalty.
• C. Bypass the audit response process and petition the Tax Court immediately for both the client’s penalty and Miller’s preparer penalty.
• D. Separate the client’s taxpayer penalty issue from Miller’s preparer penalty issue, gather the client’s substantiation and Miller’s due-diligence support, and prepare separate responses for each penalty matter.

Best answer: D

What this tests: Ethics, Professional Responsibilities and Federal Tax Procedures

Explanation: The same return position can create separate exposure for the taxpayer and the preparer. The next step is to analyze and respond to each penalty separately, using evidence relevant to the client’s conduct and Miller’s conduct.

A taxpayer accuracy-related penalty focuses on the taxpayer’s underpayment and may be defended with facts such as reasonable cause, good faith, reliance, and substantiation. A return preparer penalty focuses on the preparer’s conduct, such as whether the preparer had the required level of support for the position and made reasonable inquiries. These are not the same penalty, and success on one does not automatically resolve the other. Because the response deadline has not passed and the file lacks support, Miller should first gather client records, review workpapers, evaluate authority and due diligence, and then address each IRS proposal separately.

• A single reasonable-cause response improperly assumes the client’s defense controls the preparer’s separate penalty exposure.
• Paying the client’s proposed penalty does not resolve Miller’s preparer penalty and may be premature before analyzing available defenses.
• Immediately petitioning Tax Court skips the current examination response step and incorrectly treats both penalty matters as the same procedural issue.

The taxpayer penalty and preparer penalty have different liable parties and defenses, so Miller should first develop the facts and authority separately for each matter.

Question 4

Topic: Ethics, Professional Responsibilities and Federal Tax Procedures

A CPA is preparing a client’s federal income tax return. The client wants to report a deduction for a nonroutine transaction. The CPA’s workpaper includes the following facts:

Which action should the CPA take next if the client still wants the deduction reported?

• A. Advise the client that adequate disclosure is needed, attach Form 8275 if the position is reported, and retain documentation of the reasonable-basis analysis.
• B. Attach Form 8275-R because every uncertain position must be disclosed as contrary to a Treasury regulation.
• C. Decline to sign the return solely because the position lacks substantial authority, even if the client agrees to disclose it.
• D. Sign the return without disclosure because reasonable basis alone is sufficient for an undisclosed non-shelter position.

Best answer: A

What this tests: Ethics, Professional Responsibilities and Federal Tax Procedures

Explanation: The exhibit states that the position has reasonable basis but does not have substantial authority. For a non-shelter, non-reportable transaction, adequate disclosure can support the preparer’s signing of the return when reasonable basis exists.

A return preparer generally may avoid an unreasonable-position problem for a non-shelter position if the position either has substantial authority or has reasonable basis and is adequately disclosed. Here, the workpaper rules out substantial authority but confirms reasonable basis, and the position is not contrary to a Treasury regulation. The appropriate next action is to advise the client that disclosure is required if the deduction is reported, use the proper disclosure form, and document the authority analysis and advice given. If the client refuses required disclosure, the preparer should not sign a return reporting that position.

• Reasonable basis alone is not enough for an undisclosed position when substantial authority is lacking.
• Lack of substantial authority does not automatically bar reporting if reasonable basis and adequate disclosure are present.
• Form 8275-R is for positions contrary to regulations; the exhibit states the position is not contrary to a Treasury regulation.

Because the position lacks substantial authority but has reasonable basis and is not a tax shelter, the preparer may sign only with adequate disclosure and documented support.

Question 5

Topic: Ethics, Professional Responsibilities and Federal Tax Procedures

A CPA is reviewing Blake’s 2024 Form 1040 penalty exposure. Blake was required to file and pay by April 15, 2025, did not claim reasonable cause, and the return reported a $7,800 balance due. Which evidence best supports the conclusion that Blake’s conduct can result in federal late filing and late payment penalties?

• A. A client email stating Blake gathered tax documents before April 15, 2025
• B. An IRS account transcript showing no extension filed, the return received on July 22, 2025, and the $7,800 paid on July 22, 2025
• C. A copy of Blake’s Form W-2 showing federal income tax withholding during 2024
• D. A bank statement showing Blake had sufficient funds to pay the $7,800 on April 15, 2025

Best answer: B

What this tests: Ethics, Professional Responsibilities and Federal Tax Procedures

Explanation: Late filing and late payment penalties are supported by evidence showing the return and required payment were submitted after the due date. The IRS account transcript is the best support because it documents the filing date, payment date, and lack of extension.

A taxpayer may be subject to a failure-to-file penalty when a required return is filed after its due date, including extensions. A taxpayer may also be subject to a failure-to-pay penalty when tax shown as due is not paid by the original payment due date. Here, Blake had a balance due, no reasonable cause is asserted, and the IRS transcript shows no extension plus both filing and payment occurring after April 15, 2025. That evidence directly supports the late filing and late payment penalty conclusion.

• Federal withholding may reduce a balance due, but it does not prove whether the return or remaining tax payment was late.
• Gathering documents before the deadline does not establish that the return was filed or tax was paid on time.
• Having funds available by the due date is irrelevant if the taxpayer did not actually file and pay by that date.

This transcript directly shows both the return and the balance due were submitted after the required due date.

Question 6

Topic: Ethics, Professional Responsibilities and Federal Tax Procedures

A CPA is preparing Dalton Co.’s federal income tax return. Dalton wants to claim a $60,000 deduction based on an aggressive interpretation of an ambiguous rule. The CPA’s research shows the position has a reasonable basis but does not rise to substantial authority, and the position is not a tax shelter or reportable transaction. Dalton asks the CPA to take the position without calling attention to it. What should the CPA do?

• A. Claim the deduction without disclosure because reasonable basis alone is sufficient for any return position.
• B. Claim the deduction only with adequate disclosure and document the research and advice given to Dalton.
• C. Refuse to claim the deduction under any circumstances because it lacks substantial authority.
• D. Claim the deduction without disclosure if Dalton signs a written acknowledgment accepting responsibility for penalties.

Best answer: B

What this tests: Ethics, Professional Responsibilities and Federal Tax Procedures

Explanation: The position has reasonable basis but lacks substantial authority. For a non-shelter position, the preparer should use adequate disclosure and maintain documentation of the supporting research and client advice.

A tax return preparer may face penalties for an unreasonable position. For a position that is not a tax shelter or reportable transaction, an undisclosed position generally needs substantial authority. If the position lacks substantial authority but has reasonable basis, the preparer may generally report it if it is adequately disclosed, such as on the appropriate disclosure form. The preparer should also document the analysis and the advice provided to the client, including potential penalty exposure. A client’s preference to avoid scrutiny does not eliminate the disclosure requirement.

• Reporting without disclosure incorrectly treats reasonable basis as enough for an undisclosed position.
• Refusing under all circumstances is too strict because reasonable basis can support a disclosed non-shelter position.
• A client acknowledgment does not replace required disclosure or protect the preparer from an unreasonable-position penalty.

A non-shelter return position with reasonable basis but without substantial authority generally requires adequate disclosure to avoid being an unreasonable preparer position.

Question 7

Topic: Ethics, Professional Responsibilities and Federal Tax Procedures

Lin, a CPA, is preparing Form 1065 for Bell Partnership. The managing partner instructs Lin to deduct a $180,000 year-end “management fee” paid to a corporation owned by the managing partner’s spouse. Bell has no written agreement, invoices, time records, or description of services performed, and the bookkeeper tells Lin that similar year-end transfers were treated as partner draws in prior years. The managing partner says to “assume it is deductible and disclose it if necessary.” Under IRS practice standards, what should Lin do next before signing the return?

• A. Advise the spouse-owned corporation to report the payment as income, then claim Bell’s deduction without further inquiry.
• B. Request and evaluate additional facts and documentation about the payment before deciding whether the deduction may be claimed.
• C. Claim the deduction now and request records only if the IRS later examines the return.
• D. Claim the deduction and attach a disclosure statement because the partner agreed to the position.

Best answer: B

What this tests: Ethics, Professional Responsibilities and Federal Tax Procedures

Explanation: A practitioner may generally rely on client-provided information, but not when the information appears incomplete, inconsistent, or unsupported. Here, the related-party payment lacks substantiation and conflicts with prior treatment, so Lin must obtain and evaluate additional facts before taking the return position.

IRS practice standards require due diligence in preparing returns and giving tax advice. A CPA cannot ignore implications of known facts or base a position on unreasonable assumptions supplied by the client. The related-party payment, lack of invoices or service records, and prior treatment as partner draws are warning signs that the deduction may be unsupported or mischaracterized. Lin should make reasonable inquiries, obtain relevant documentation, and evaluate whether the deduction has adequate factual and legal support. If Bell cannot provide support, Lin should not claim the deduction and may need to decline or withdraw from the engagement.

• Disclosure does not cure a position that lacks adequate factual support.
• Waiting for an IRS examination skips the preparer’s due diligence obligation before signing the return.
• The recipient’s income reporting does not establish Bell’s right to deduct the payment.

The information is incomplete and inconsistent, so Lin must make reasonable inquiries and cannot rely on the client’s unsupported assumption.

Question 8

Topic: Ethics, Professional Responsibilities and Federal Tax Procedures

Marin, an individual taxpayer, was a legal resident of California for the tax year at issue and when she filed a petition in the U.S. Tax Court. The issue is whether a disputed payment is deductible. No statute, regulation, or Supreme Court case directly resolves the issue. The available authorities are all final and materially on point:

What is the best interpretation of which authority should control the Tax Court’s decision?

• A. The IRS revenue ruling should control because it states the IRS’s published administrative position.
• B. The Southern District of New York decision should control because it agrees with both the IRS and the Tax Court.
• C. The Ninth Circuit opinion should control because appeal from Marin’s Tax Court case would lie to that circuit.
• D. The Tax Court reviewed opinion should control because the case is being heard by the Tax Court.

Best answer: C

What this tests: Ethics, Professional Responsibilities and Federal Tax Procedures

Explanation: The Ninth Circuit’s published decision is the controlling authority for this Tax Court case because Marin resides in California, and an appeal would go to the Ninth Circuit. Under Tax Court practice, directly on-point appellate precedent for the appealable circuit overrides contrary Tax Court precedent in that case.

When authorities conflict, jurisdiction matters. The Tax Court is a national trial court, but it generally follows the precedent of the U.S. Court of Appeals to which the taxpayer’s case would be appealed when that precedent is directly on point. For an individual California resident, appeal from the Tax Court would generally lie to the Ninth Circuit. Therefore, the Ninth Circuit’s published holding allowing the deduction should control over a contrary Tax Court reviewed opinion, an IRS revenue ruling, and a district court decision from another jurisdiction.

• The Tax Court reviewed opinion is precedential, but it yields when the relevant Court of Appeals has directly contrary controlling precedent.
• The IRS revenue ruling may be persuasive and states the IRS’s position, but it does not bind the Tax Court.
• The Southern District of New York decision is not controlling for a California taxpayer’s Tax Court case, even if it aligns with other adverse authorities.

The Tax Court generally follows directly controlling precedent of the Court of Appeals to which the case is appealable.

Question 9

Topic: Ethics, Professional Responsibilities and Federal Tax Procedures

Mei, an individual taxpayer who lived in Texas for all relevant years, received a 30-day letter proposing to disallow a deduction. Her CPA is preparing a request for an IRS Appeals conference and evaluating the likely result if Mei later petitions the Tax Court. Research shows:

• The statute and final regulations do not resolve the disputed point.
• No U.S. Supreme Court or Fifth Circuit decision addresses the issue.
• A precedential Tax Court regular opinion allowed the deduction on materially identical facts.
• A Ninth Circuit decision disallowed the deduction on materially identical facts.
• An IRS publication agrees with the revenue agent.

If Mei petitions the Tax Court, any appeal would lie to the Fifth Circuit. What should the CPA do next?

• A. Treat the IRS publication as controlling authority because the matter is still in the examination and Appeals process.
• B. Concede the adjustment because any Court of Appeals decision controls over any Tax Court regular opinion nationwide.
• C. Prepare the Appeals submission using the Tax Court regular opinion as the primary precedential support and address the Ninth Circuit decision as contrary but noncontrolling for Mei’s Tax Court case.
• D. File a Tax Court petition immediately because the 30-day letter starts the Tax Court petition period.

Best answer: C

What this tests: Ethics, Professional Responsibilities and Federal Tax Procedures

Explanation: The controlling appellate jurisdiction matters. Because Mei’s Tax Court case would be appealable to the Fifth Circuit and there is no Fifth Circuit or Supreme Court authority, the adverse Ninth Circuit case is not controlling, while the Tax Court regular opinion is the best precedential support for the Appeals submission.

In federal tax disputes, a Tax Court case generally follows the precedent of the Court of Appeals to which the case would be appealed. For an individual residing in Texas, that appellate venue is the Fifth Circuit. Since no Fifth Circuit or Supreme Court authority resolves the issue, the Ninth Circuit decision is contrary persuasive authority but does not control Mei’s Tax Court case. A precedential Tax Court regular opinion on materially identical facts is therefore the strongest authority to use in the Appeals request. The CPA should still address the adverse Ninth Circuit case rather than ignore it, but should not treat it as dispositive for Mei’s venue.

• A Court of Appeals decision is not automatically controlling nationwide; appellate venue determines whether it binds the Tax Court in that taxpayer’s case.
• An IRS publication may reflect the Service’s view, but it does not override precedential judicial authority.
• A 30-day letter allows an Appeals protest; a Tax Court petition generally follows a statutory notice of deficiency, not the 30-day letter.

Because Mei’s Tax Court case would be appealable to the Fifth Circuit, the contrary Ninth Circuit decision is persuasive but not controlling.

Question 10

Topic: Ethics, Professional Responsibilities and Federal Tax Procedures

A CPA is preparing an individual income tax return. The taxpayer emails, “Report a $65,000 loss from my cousin’s partnership; the Schedule K-1 is not available yet, but I invested cash late in the year.” The prior-year return and the current-year organizer show no partnership interest, and the claimed loss would eliminate the taxpayer’s taxable income. The CPA does not ask for the K-1, ownership details, basis, at-risk amount, or passive activity information and files the return with the loss. Under IRS practice standards, how should the CPA’s conduct be characterized?

• A. Acceptable written tax advice because the CPA relied on the taxpayer’s stated facts and assumptions
• B. Permissible reliance on client-provided information because practitioners are not required to audit or verify every taxpayer statement
• C. A failure to exercise due diligence because the information was incomplete or inconsistent and required reasonable inquiry before reporting the loss
• D. Competent representation because reporting a partnership loss is a routine individual return preparation matter

Best answer: C

What this tests: Ethics, Professional Responsibilities and Federal Tax Procedures

Explanation: The CPA’s conduct is best classified as a due diligence failure. IRS practice standards allow reliance on client information in good faith, but not when the facts supplied appear incomplete, inconsistent, or questionable without reasonable follow-up.

A practitioner preparing a return must exercise due diligence as to the accuracy of the return and related representations. The practitioner does not have to audit the client’s statements, but cannot ignore implications of information furnished or facts already known. Here, a large partnership loss is claimed without a K-1 or supporting ownership, basis, at-risk, or passive activity information, and the taxpayer’s records do not otherwise show a partnership interest. Those facts make simple reliance unreasonable. The CPA should make reasonable inquiries and obtain sufficient information before reporting the loss or advise the taxpayer that the position cannot be reported as presented.

• General reliance on client information is allowed only when reliance is reasonable under the facts.
• Competence is not the best classification because the issue is not merely whether the CPA can prepare an individual return; it is the failure to follow up on questionable information.
• Written advice standards do not excuse filing a return position based on incomplete facts and unsupported assumptions.

A practitioner may generally rely on client information, but must make reasonable inquiries when the information appears incomplete, inconsistent, or questionable.

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Related focused pages

• Free CPA REG Full-Length Practice Exam
• CPA REG: Business Law
• CPA REG: Federal Taxation of Property Transactions
• CPA REG: Federal Taxation of Individuals
• CPA REG: Entity Taxation and Tax Preparation

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